European stock markets sink into the red in the wake of Wall Street

Posted Jan 21, 2022, 9:36 AMUpdated on Jan 21, 2022 at 12:06 PM

The nervousness is palpable on the world stock exchanges. European markets opened sharply lower on Friday, weighed down by the amplification of the correction in technology stocks on Wall Street. The CAC 40 index was down more than 1% at the end of the morning. The other major European markets were also moving into negative territory.

Investors are treading cautiously as turmoil appears to intensify on Wall Street. Despite a lull on the bond front, with a slight easing of long rates, the Nasdaq’s correction with strong technological coloring intensified on Thursday. It closed down 1.3% after rebounding more than 2% during the session, bringing its fall to almost 12% since its peak on November 19.

The results worry

Volatility has been rising almost constantly since the beginning of the year. The VIX index, dubbed the fear index because it tends to rise when tensions mount in the markets, gained nearly 10 points over the period. Investors, already shaken by the prospect of an acceleration in the Fed’s monetary policy tightening, had a hard time digesting certain corporate publications that were less buoyant than expected.

The difficulties of the exercise bike specialist Peloton and the streaming giant Netflix are worrying. These two stocks emblematic of the pandemic are struggling to meet the high expectations of analysts.

“Growth is stalling”

“In other words, growth is stalling: it’s fatal on the stock market for a richly valued technology group,” said Tangi Le Liboux of Aurel BGC. Peloton and Netflix, which had soared during the first confinements, are thus on the way to erasing all the gains accumulated during the pandemic.

Another worrying factor: the sharp rise in wages in the major Wall Street banks, from the end of last year, which is already beginning to weigh on margins. Goldman Sachs has thus reported a 31% jump in its labor costs in the fourth quarter. Its stock has fallen more than 10% this week.

The Old Continent resists the fall of Wall Street

The good news, for European investors at least, is that the Old Continent is resisting. While the Nasdaq plunged by almost 10% in January, and the S&P 500 by around 6%, the European indices show declines from 0.3% for the Madrid Stock Exchange to 1.3% for Frankfurt. The Paris Stock Exchange lost 0.7% over the month.

But while “there is clearly a change of regime at work on Wall Street”, notes Tangi Le Liboux, the question is to know “how long Europe can resist”, he warns.

A “super bubble”

A disaster scenario would see the correction rapidly intensify across the Channel. This is in particular the thesis defended by Jeremy Grantham, the founder of the manager GMO (60 billion dollars in assets), famous for having identified numerous speculative bubbles.

This Wall Street legend believes that the US markets are in a “super-bubble”, the fourth in a century after 1929, 2000 and 2008, which is finally about to burst. The Fed, concerned about the rise in inflation, will not be able to save the stock market this time, he fears.

“When pessimism takes over the markets, we risk being faced with the biggest fall in financial wealth in the history of the United States,” he warns. The S&P 500 could crash 45%, and the Nasdaq even more.

A respite on rates

The next few days should be key in shaping investor perceptions. The evolution of long rates will be watched like milk on fire, with the first meeting of the Fed of the year on Wednesday. After their sharp rise in recent days, “we anticipate a stabilization of bond yields which could calm things down,” explains Emmanuel Cau of Barclays.

In addition, the publications of results will accelerate from next week, with Microsoft and Apple in particular. “The earnings season should be reassuring, with solid earnings overall,” said the strategist. Good surprises on the front of rising costs and a reassuring outlook for the coming year would be of great help in stabilizing the markets.

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